Pass the CSI Canadian Securities Course CSC2 Questions and answers with ExamsMirror

Investment advisors (IAs) are required to record the names and addresses of all individuals who have requested and received a preliminary prospectus. This ensures compliance with securities regulations and provides a record for follow-ups and potential disclosures related to the offering.

A. The IA must ensure a proxy is mailed: Proxy voting is related to shareholder meetings, not the prospectus distribution.

B. The IA must provide a greensheet: A greensheet is used internally by investment firms, not distributed to clients.

C. The IA must make a tombstone advertisement: Tombstone advertisements are created by the issuer, not the IA.

TheMontreal Exchange (MX)is the sole Canadian exchange that lists and trades all financial and equity futures and options. It is a derivatives exchange specializing in these products and is part of the TMX Group.

A. ICE NGX Canada: This platform focuses on energy products like natural gas and electricity, not equity futures or options.

B. Canadian Securities Exchange: This exchange supports small-cap stocks but does not deal with derivatives.

D. Toronto Stock Exchange: This exchange lists equities and some other securities but does not specialize in trading futures or options.

Preferred shares provide investors withpriority to receive fixed dividends ahead of common shareholders. This fixed income feature makes preferred shares similar to debt instruments but with characteristics of equity. While preferred shareholders have no guaranteed dividend payment (subject to the company’s discretion and profitability), they are entitled to receive dividends before any distribution to common shareholders.

Preferred shares do not have a higher potential for capital appreciation compared to common shares, as they are typically designed for income rather than growth. Additionally, preferred shareholders have a lower claim on assets compared to debt holders.

When a shareholder sells rights on the exchange, the proceeds of the sale represent the capital gain. Rights provide shareholders with the opportunity to purchase additional shares of acompany at a discounted price. If a shareholder chooses not to exercise these rights and instead sells them on the secondary market, the value they receive from the sale constitutes their capital gain.

Rights Offering:

A rights offering allows existing shareholders to purchase additional shares at a set price (exercise price) within a specific period.

Shareholders can either exercise these rights or sell them on the market.

Capital Gain Calculation:

The capital gain from selling the rights equals the sale price. This is because the rights themselves were issued at no cost to the shareholder.

The exercise price is irrelevant to the calculation as the rights were not exercised.

Tax Implications:

The gain from the sale of rights is treated as a capital gain for tax purposes. Only 50% of the capital gain is taxable under Canadian taxation rules.

Since the shareholder did not exercise the rights but sold them, the capital gain is the sale price of the rights. Subtracting the exercise price or using the share price is unnecessary and incorrect for this scenario.

Key Concepts:Why Option A Is Correct:References from CSC Study Materials:

Volume 2, Chapter 24: "Canadian Taxation," Section on Capital Gains and Losses​​.

Trade-matching is a critical process in institutional trading, ensuring that details of a trade (e.g., price, quantity, and settlement terms) align among the involved parties, including the investor, dealer, and custodian. In Canada, institutional trade matching must occur within a specific timeline, and the investor is responsible for providing trade-matching elementsafter the trade execution notice is issued by the dealer.

Step-by-Step Explanation:

What is Trade Matching?Trade matching involves the comparison of trade details between the buyer and seller (and their intermediaries) to confirm accuracy and reduce settlement risks.

When Does the Investor Provide Trade-Matching Elements?

After the dealer executes the trade, the dealer issues atrade execution noticeto the investor.

The investor must then provide the necessary trade-matching details, such as account information, settlement instructions, and any other required confirmations.

This process ensures that the trade can move seamlessly through to settlement.

Why Not Other Options?

Option B (Once the custodian confirms the trade):Incorrect. The custodian’s role is typically involved in the final settlement process and not in providing trade-matching details.

Option C (With the initial order):Incorrect. Trade-matching details are provided after the trade is executed, not at the time the order is placed.

Option D (Once the trade clears):Incorrect. Trade matching occurs before the trade clears to ensure settlement.

References to Canadian Securities Course Exam 2 Study Materials:

Volume 2, Chapter 27 – Institutional Clearing and Settlement

Highlights the process of institutional trade matching, the roles of the investor, dealer, and custodian, and the required timelines​.

Volume 2, Chapter 27 – The Sell Side and the Buy Side of the Market

Explains trade execution and the responsibilities of institutional clients and their intermediaries in completing trades​.

Final Answer:

Option A (After the dealer issues a trade execution notice): Correct.

Other options are incorrectbased on the standard processes for institutional trade matching in Canada.

Analternative trading system (ATS)is a trading platform that is not a formal stock exchange but allows for the buying and selling of securities. Adark poolis a type of ATS where trade details are not displayed until after execution, providing anonymity to large institutional trades. Other options like venture exchanges, pink sheets, and OTC bulletin boards are not considered ATSs.

References:

Volume 1, Chapter 9, "Alternative Trading Systems"​.

The investor's goal is to gainexposure to the Canadian stock marketwhile maintainingminimal risk exposure. Among the provided options, anindex-linked guaranteed investment certificate (GIC)is the most suitable choice.

Key Characteristics of an Index-Linked GIC:

Capital Protection:

Index-linked GICs guarantee the principal investment amount, offering the security of a GIC while tying returns to the performance of a stock index (e.g., the S&P/TSX Composite Index).

This ensures no loss of capital regardless of market performance.

Market Exposure:

The return on an index-linked GIC is linked to the performance of the underlying index, providing exposure to the stock market. However, this comes without the downside risk associated with direct stock or fund investments.

Low Risk:

The combination of principal protection and market exposure makes it ideal for risk-averse investors seeking growth potential.

Review of Other Options:

A. Canadian Bank Preferred Shares:

While preferred shares provide stable dividends and relatively low volatility compared to common shares, they still carry market risk and are not as secure as GICs.

B. Index Exchange-Traded Fund (ETF):

ETFs track stock indices and offer diversification, but they expose investors to the full market risk of the underlying index, making them unsuitable for those seeking minimal risk exposure.

C. Call Option:

Call options are speculative derivatives that provide leverage for market exposure but carry significant risk of loss, making them inappropriate for a low-risk investor.

Why D is Correct:

Anindex-linked GICbalances the investor's objective of gaining exposure to the Canadian stock market with the need for minimal risk by guaranteeing principal protection while offering potential returns tied to market performance.

References:

Canadian Securities Course (CSC), Volume 1, Chapter 6: Fixed-Income Securities – Features and Types. Discussion on index-linked GICs and their suitability for risk-averse investors​.

Explanation of risk characteristics of preferred shares, ETFs, and derivatives in Chapter 8 and 10 of Volume 1​.

Exchange-traded notes (ETNs) are debt instruments issued by financial institutions that provide returns linked to a specified index or benchmark. Unlike exchange-traded funds (ETFs) or mutual funds, ETNs do not hold assets like stocks or bonds. Instead, they rely on the issuer’s creditworthiness. Tracking error occurs when the performance of an investment fund deviates from its benchmark index due to operational factors like fees, rebalancing, or dividend treatment. Since ETNs directly track the performance of the underlying index through a structured debt instrument, they are immune to the operational causes of tracking error.

References:

CSC Volume 2, Chapter 23: Structured Products – Types and Features​.

CSC Volume 2, Chapter 19: Exchange-Traded Funds – Tracking Error Risks and Benefits​.

To reduce a national deficit, governments canincrease taxationto generate more revenue. This measure, combined with controlled spending, helps reduce the shortfall between revenues and expenditures.

B. Increase government spending: This would increase the deficit further unless matched by revenue increases.

C. Decrease taxation: This would reduce revenue and worsen the deficit.

D. Increase interest rates: This impacts monetary policy and borrowing costs but does not directly reduce a fiscal deficit.

Detailed Explanation:Treasury bills (T-bills) are short-term government debt instruments with minimal risk of default. Their returns are often used as a proxy for therisk-free ratein financial analysis, as they represent the theoretical return on an investment with zero credit risk. The risk-free rate is critical for discounting cash flows and comparing returns on various investments.

Other options:

A. Bank prime rateis the interest rate commercial banks charge their most creditworthy customers.

B. Inflation rateis unrelated to the direct return on T-bills, though it impacts real returns.

D. Federal funds rateapplies in the U.S. to interbank lending, not directly to T-bills​​.

CSC Volume 1 (2023 Edition): Chapter on the financial markets, inflation, and trade settlement​.

CSC Volume 2 (2024 Edition): Sections on portfolio analysis and risk-free securities​.

References: